Why our continent’s faith in foreign direct investment as a solution to our poverty is a pipedream
THE LAST WORD | Andrew M. Mwenda | Many presidents in Africa believe the development of our nations will come from Foreign Direct Investment (FDI). If a “foreign investor” – most especially a white man (and today increasingly an Arab, Indian or Chinese) – showed up in the capital of an African country, he would easily get audience with the president even where local investors take months or even years to be listened to.
And it is not just leaders. African elites – professionals, civil servants, journalists, academics, etc. – believe this gospel as well. Our leaders are products of our societies and their thinking reflects our attitudes, beliefs, sentiments, and shared mentalities. FDI is part of the wider belief that to develop, Africa needs to adopt the ways of the developed (Western) world. So even an intellectual kamikaze like me can only criticise FDI with a lot of trepidation.
The argument goes like this: Poor countries lack sufficient savings to finance necessary investments. FDI fills this gap. It also brings skills – technical and organisational. It creates jobs by employing locals and pays taxes thereby increasing the fiscal resources available to the state to serve its citizens. And it helps integrate the local economy into the global system of investment and trade. Who can question this?
These benefits are real but misleading. They are short-term achievements with long-term high costs. Foreign firms, given their experience and resources, tend to displace or stifle the development of indigenous/domestic/national firms. And as a rule, they do not export to their subsidiaries the most transformative activities of their business; such as research, design, and development. So a host country can assemble cars or mobile phones but cannot manufacture them. Yet most value is produced from these activities.
Building local firms is costly, both financially and politically. For example, assuming Uganda wanted to manufacture cars, like our famed Kiira Ev, which no one believes in, the government would have to protect it from international competition through high tariffs and subsidies. In the short term (20 to 40 years), Ugandan taxpayer would be subsidising the manufacturer and consumers would endure a poor quality product whose future is very hard to predict at a high price.
Yet the long term value of developing your own products such as Toyota or Sam Sung are extremely high – if you succeed. This becomes a difficult undertaking because the failure rate of such companies/products is very high; on average about two out of ten will succeed. This is what makes industrial policy difficult and FDI seem a welcome relief. Yet every country that has transformed from a poor agricultural society to an advanced industrial economy has had to pay this short-term cost. If Africa fails to industrialise, it is because we are not willing and/or are unable to accept to suffer this cost.
Notice that I have ignored other problems associated with FDI such as smuggling, profit repatriation, reliance on expatriates, transfer pricing, tax evasion or even officially granted tax relief etc. The later three issues are vital because for FDI to make money, it relies on public investments in education, health, roads, airports, railways, water systems etc. If it does not pay its fair share of taxes, it means that it is really cheating the host country that uses public funds to pay for the aforementioned investments.